Capital Migration: 20% of Global Liquidity Shifts to Stablecoins

Capital is undergoing a significant structural reallocation, with funds that were once securely held in fractional-reserve bank accounts now increasingly flowing into fully funded, blockchain-based financial systems. This shift is driven by the appeal of programmability, global interoperability, and perceived safety, as seen in stablecoins like USDC and USDT, as well as tokenized T-bills. This movement is more than just a migration of money; it represents a replatforming of financial infrastructure, with implications for both institutional and retail capital.

In traditional banking, commercial banks operate on fractional reserves, where deposits are only partially backed, and banks create money through lending. This model offers high capital efficiency and elasticity, supporting economic growth by expanding credit. However, it comes with fragility, maturity mismatches, and systemic dependency on central banks. Payment rails, such as ACH and SEPA, rely on netting, credit lines, and settlement-finality delays, with liquidity managed across a network of intermediaries and backstops.

In contrast, stablecoins operate on a one-to-one reserve basis, with transactions settling instantly, transparently, and irreversibly. This design requires pre-funding and eliminates endogenous credit creation, offering trust minimization and atomicity but introducing capital intensity and operational burdens when interfacing with traditional finance. The concept of “singleness of money” is challenged by this divide, as stablecoins cannot seamlessly substitute for fractional bank deposits without deep interoperability and synchronized settlement.

A growing share of global liquidity is migrating into stablecoins, representing a shift in monetary architecture. This movement could implement a modern version of the Chicago Plan, disintermediating banks and replacing deposit money with full-reserve alternatives. Capital moving from bank accounts to stablecoins reduces the banking sector’s access to cheap funding, raises competition for deposits, and may necessitate credit contraction. In aggregate, this migration locks capital into instruments that, while liquid, are not economically leveraged. The implications ripple beyond banking, as stablecoin issuers invest in T-bills and repos, crowding out other credit users, distorting short-term funding markets, and elevating systemic liquidity needs.

Stablecoins promise real-time settlement and global reach, yet their fully reserved design introduces frictions that the credit-based banking system never had to confront. Because a stablecoin cannot lend on its own balance sheet, any yield must come from taking explicit risk elsewhere—risk that large institutions will only bear when compensation, clarity, and infrastructure are sufficient. Frictions arise from the real cost of on-chain yield, pre-funding both legs of a trade, and liquidity strains from mismatched finality. Markets must keep capital parked simultaneously in “instant” on-chain rails and in slower, batched banking rails simply to reconcile the two worlds.

In response to these pressures, JPMorgan has launched tokenized deposits—programmable, on-chain claims on the bank’s own liabilities that still sit inside a fractional-reserve, regulated framework. With this move, the bank aims to keep control of customer balances and associated credit relationships, deliver the user experience of stablecoins without surrendering monetary control, and pre-empt large-scale migration of deposits to third-party issuers. It is, in essence, a defensive play: bring deposit money on-chain before stablecoins siphon it away. The architecture is technically elegant but not without trade-offs. Users may assume atomic, irrevocable settlement, yet the underlying asset remains embedded in a credit system subject to maturity transformation and regulatory intervention—an opacity that contrasts sharply with the transparent-reserves ethos of non-fractional stablecoins.

Concepts such as the one from JPMorgan raise an interesting question: Can we avoid the binary choice between rigid, fully funded systems and elastic, credit-generating banks? Emerging solutions suggest that we can, with hybrid models that aim to balance capital efficiency with transparency and programmability. These models are not frictionless, but they are functional, including structured tranching to create real yield from risk allocation, regulated insurance overlays using idle crypto collateral, tokenized T-bill wrappers, and CDOR Futures based on the live CDOR index.

Money itself is splintering into multiple on-chain and off-chain forms, yet the pool of deployable capital is finite. The contest between fractional-reserve banking and non-fractional stablecoins is therefore a fight over who gets to issue, settle, and earn the spread on digital dollars. Left unchecked, the shift could erode credit creation and the liquidity buffers that support traditional finance. Guided well, it promises a safer, faster, more programmable financial stack. The landscape is consolidating around players that can straddle both worlds of money, including specialized intermediaries, capital-efficient protocols, and banks that adapt to tokenize deposits while preserving the strength of their own balance sheets. The real winners will be those who can intermediate between the two monetary systems and reduce the capital intensity of bridging them.